SERVICES

In 2016, Services revenues reached EUR6,078mn, +24.1% vs. 2015.

This growth was due to the contribution from Broadspectrum, an Australian company acquired in May 2016, with an enterprise value of EUR934mn (EUR499mn corresponding to 100% of the equity and EUR435mn of net debt). The financial statements of Broadspectrum have been consolidated since 31 May 2016. Thus, the P&L in December includes a seven-month contribution from the company.

With this incorporation, Ferrovial Servicios acquires a leadership position in the services and infrastructure maintenance sector in Australia and New Zealand, and also Ferrovial Servicios’s entry into the USA and Canada. Additionally, it allows Ferrovial Servicios access to the telecommunications and oil & gas activities, and to take advantage of the likely recovery of these activities in the medium term.

The following table shows the Profit & Loss Account of the Services division compared with December 2015, taking out the Broadspectrum contribution and the costs associated with the acquisition (EUR7mn):

Excluding Broadspectrum, Services revenues stood at EUR4,631mn, and EBITDA at EUR242mn (5.2% margin). In comparable terms, excluding the exchange rate impact, sales rose by +2.8% compared to 2015. In Spain, the increase was +5.1%, in the UK +0.7% and International +19.8%.

The EBITDA margin stood at 5.2%, (excluding Broadspectrum) below the 6.4% reported in December 2015, mainly as a consequence of the negative performance in the UK. The EBITDA figure includes EUR21mn of restructuring costs in the UK, the bulk of which are related to personnel layoffs. Excluding these costs, the Services division’s EBITDA margin at December 2016 would have been 5.7%.

In December, the order book reached EUR24,431mn, +7.2% up on December 2015. Excluding Broadspectrum and the FX impact, the order book would be 11% below the December level. In general terms, this reduction in the order book has been driven by the lack of public offers and shorter average terms for the contract that come to tender, both in Spain and in the UK. Furthermore, the public tendering process, for the majority of utilities contracts in the UK is set by the regulatory period, therefore up until 2019, when the current period expires, there will be less public tendering processes activity.

SPAIN

Revenues in Spain grew by +5.1% compared with 2015 against a background of fewer public tendering processes, due to the successive elections, and uncertainty throughout much of the year regarding the formation of a government. The growth in revenues comes from the greater revenues from infrastructure maintenance, mainly in relation to industrial facilities, and from waste treatment. EBITDA and EBIT margins remained in line with those of 2015.

The order book volume stood at EUR5,741mn (-6.5% compared with December). The decline in the order book is directly related to the reduction in public sector projects out to tender. A notable event this year was the renewal of the contract for the collection and transportation of waste in Madrid (EUR87mn over 4 years) and the extension for 9 years of the contract for overall management of the waste landfill at La Vega in Seville (EUR46mn).

UK

In the United Kingdom, the profit and loss account showed very significant reductions in both margins and results, due to the current budgetary restrictions affecting public authorities, mainly with regard to local government.

In this regard, the Company drew up a restructuring plan in 2016, with the aim of adapting to this new environment, marked by budgetary restrictions. As a consequence of this plan, the workforce has been reduced by more than 900 people. The cost associated with the restructuring totalled EUR21mn. The annual savings from the restructuring process are estimated in EUR42mn, from which, EUR18mn have been already registered in 2016. In 2017, margins and EBITDA are expected to improve with respect to 2016, as a result of the restructuring plan carried out in 2016, although revenues will be lower. Nevertheless, this evolution will also depend on the impact that government fiscal measures could have regarding public authority budgets in 2017.

EBITDA in 2016 rose to EUR41mn, which included EUR21mn in restructuring costs. Excluding these costs, the EBITDA would be EUR62mn (2.2% of revenues). In comparable terms (excluding the impact of exchange rates and restructuring costs), EBITDA fell by -45% compared with 2015, which in absolute terms represents a fall of EUR50mn in the overall result.

The main impacts causing this negative performance are:

• Highway maintenance: As a result of the aforementioned budget restrictions, highway maintenance contract volumes fell by an average of -23%, although in some contracts the reduction reached up to -40%. This fall in volumes has had a very significant impact on results, given that it affects additional works that offer greater profitability, since they allow for optimisation of fixed contact costs. As of December 2016, revenues from traditional road maintenance contracts amounted to EUR365mn. As regards the coming years, a prudent position will be maintained in this market while the current budgetary restrictions remain in place, so no growth is therefore anticipated in this area.
• There have also been negative impacts on contracts that have already ended, due to the final accounts of such contracts, among which we would highlight Herefordshire (-EUR12mn) and Cumbria (-EUR6mn).
• Remainder of Amey’s activities: the result fell vs 2015, due in large part to the extraordinary income earned in 2015 in railway consulting contracts.
• The losses for 2016 from the Birmingham contract amounted to -EUR13mn. In relation to the provision registered in 2015, in 2016 EUR10mn were freed up (GBP8mn) leaving the outstanding balance on the provision at EUR55mn (GBP47mn). The contract result continued to be negative, due to extra Opex and structural costs, as it has not been possible to reduce costs in the way that was expected following completion of the capex phase, due to the lawsuit with the City Council. In 2016, the judge ruled in favour of Amey in this lawsuit. During the final quarter of the year, progress was made in talks with the client with regard to the award of the legal judgement in Amey’s favour and the resolution of the commercial disputes, with a view to achieving normalisation of the contract.

INTERNATIONAL

The International business includes the activities of Ferrovial Servicios in Portugal, Poland, Chile and Qatar.

In comparison with 2015, and ex-FX impact, revenues from this activity rose by +19.8% and EBITDA by +17.8%. The EBIT is marginally lower than in 2015, due to the depreciations of two treatment plants in Poland incorporated over the course of 2016. Revenue performance is positive in all countries: Chile EUR67mn (+15.4% vs. 2015); Poland EUR41mn (+43.2% vs. 2015) and Portugal EUR29mn (+9.6% vs. 2015).

As regards the order book, this stood at EUR675mn vs. EUR336mn in December 2015. The most significant contract award of the year has been the three-year renewal of the Doha Airport maintenance contracts (EUR160mn).

BROADSPECTRUM

As mentioned previously, Broadspectrum’s financial statements have been consolidated since 31 May. Thus, the P&L to December includes a 7 month contribution from the company.

Broadspectrum’s results include EUR7mn of acquisition costs and EUR60mn of intangible amortisation assigned to the contracts. Excluding these impacts, EBITDA would have reached EUR91mn (6.3% margin) and EBIT at EUR62mn (4.3% margin).

The integration of Broadspectrum was carried out in line with the expected plan. The company’s pipeline is solid, which together with its investment capacity and service offering complementary to other Group activities, should be reflected in future growth. To take advantage of these opportunities, the company has reorganised itself around four sectors in Australia and New Zealand, and has made America into an independent management unit.

In Australia and New Zealand, the sectors of the new organisation and the revenues of each in June-December are as follows:

• Government (EUR669mn): Includes all the current contracts with regional and central governments.
• Urban Infrastructures (EUR326mn): Includes activities in the water, electricity, energy and telecommunications sectors.
• Natural Resources (EUR195mn): Focused on the maintenance and operation of wells and oil, gas, mining and agricultural installations, as well on solutions for industrial clients.
• Transport (EUR100mn): Includes activities related to the highway, railway and public transport networks.

In the America unit, (USA, Canada and Chile) revenues in the period between June-December 2016 reached EUR161mn. In the USA it carries out highway and natural resource maintenance activities, in Canada highway maintenance, and in Chile, mining services.

In the financial results to June 2016, the company stated that the Australian Department of Immigration had informed Broadspectrum of its right to unilaterally extend its immigration centre contracts for two four-month periods.

Ferrovial stated that it does not consider these contracts strategic for the Company. Broadspectrum will fulfil its contractual obligations until end-October 2017. Until then, its first priority will be caring for the refugees in the centres.